Low Gold And Copper Prices And Impairment Charges Will Hurt Newmont’s Profits

+43.29%
Upside
35.84
Market
51.36
Trefis
NEM: Newmont Mining logo
NEM
Newmont Mining

Newmont Mining (NYSE:NEM) will release its fourth quarter earnings results on February 20. The company has already released attributable production data for the quarter. The production of both gold and copper was higher than in the comparable period last year. In addition, shipments of gold and copper increased year-over-year. The average price of gold in the fourth quarter this year was much lower than the price over the same period last year. Considering that gold shipment figures haven’t risen as spectacularly as the prices has fallen, we conclude that Newmont will report lower revenues on a year-over-year basis. ((Gold Price Charts, Kitco))

Newmont expects to raise both gold and copper production in 2014 but we think that the quantum of increase will not be enough to offset the negative impact of low copper and gold prices. In our opinion, cost cutting efforts will be crucial for maintaining similar profit levels.

We have a Trefis price estimate for Newmont Mining of $24, which is nearly the same as the current market price.

Relevant Articles
  1. Is Newmont Stock Attractive Post The Q2 Sell-Off?
  2. What To Expect From Newmont’s Q1 2023 Earnings
  3. What’s Happening With Newmont Stock?
  4. Why Newmont Stock Looks Attractive
  5. What’s Next For Newmont Stock After A Tough Q2 Report
  6. Will Newmont Stock Bounce Back?

See our complete analysis for Newmont here

Production

Newmont reported fourth quarter attributable gold and copper production of 1.448 million ounces and 38 million pounds respectively. The production of gold was higher compared to the previous year’s comparable period figure of 1.251 million ounces, and that of copper was higher than the Q4 2012 figure of 35 million pounds. Attributable gold and copper sales were 1.475 million ounces and 45 million pounds respectively. These compare to the figures of 1.231 million ounces of gold and 42 million pounds of copper last year. ((Newmont Achieves 2013 Production Target; Provides 2014 Outlook, Newmont Press Release))

For the whole year, gold production stood at 5.065 million ounces and copper production stood at 144 million pounds. These figures are higher than the reported 2012 production figures of 4.977 ounces of gold and 143 million pounds of copper. The production of gold was higher this year due to strong performance at Tanami, Waihi and Kalgoorlie mines as well as the commissioning of the Akyem mine in Ghana. The production of copper benefited from the commissioning of the Phoenix Copper Leach operations.

Gold And Copper Prices

The company reported average realized prices of approximately $1,393 per ounce of gold and $2.96 per pound of copper for 2013. This represents a steep decline from the average realized prices of $1,662 per ounce of gold and $3.43 per pound of copper in 2012. The price of gold declined largely due to quantitative easing (QE) taper pronouncements by the Federal Reserve Bank while the price of copper suffered because of an economic slowdown in China. [1]

The price of gold this year has been reacting largely to the Federal Reserve Bank’s various pronouncements and hints about continuing or tapering down monetary stimulus measures, better known as Quantitative Easing (QE). The first steep fall in price came in April when the minutes from the Federal Open Market Committee (FOMC) meetings suggested that the bank may stop its bond purchasing program well before the end of 2013. [2]

A second steep fall in prices occurred in June when the Federal Reserve Bank chairman Ben Bernanke announced his intention to reduce the quantitative easing program or possibly withdraw it later in the year, if the U.S. economy and job market were to improve. [3]

However, gold prices again started inching upwards in July when a second announcement from Mr. Bernanke suggested that economic data continued to remain weak and the Federal Reserve may continue with monetary easing for the time being. In the wake of some positive economic data ahead of the monetary policy review meeting of the Federal Reserve in mid-September, the market largely expected the bank to begin a gradual QE tapering process. Accordingly, the price of gold began falling in September. After a brief rally following events in Syria, gold resumed its downward slide and has been falling since then.

On the whole, the average price of gold for the fourth quarter this year has been much lower than in the fourth quarter last year. Therefore, we expect Newmont to report lower year-over-year profits for the fourth quarter.

Copper prices this year have been trending lower than last year mainly due to the slow economic growth rate in China. Since China accounts for nearly 40% of the total world consumption of copper, its economy has a significant impact on copper prices. The country is in the process of reorienting its economy away from investment in capital assets and towards greater domestic consumption. ((LME Copper Prices, LME))

The impact of low gold prices will be felt in Q1 2014 dividends because Newmont links quarterly dividend to the previous quarter’s realized gold price.

Impairment Announcements Are Likely

The value of gold mining assets depends to a large extent on the price assumption of gold used in their valuation. A significant downfall in gold prices, especially one that is unlikely to be reversed anytime soon, forces mining companies to reduce the value of these assets on their balance sheets. Given the steep fall in gold prices over last year and the fact that Newmont’s previous reserve valuations assumed a long term gold price of $1,400 per ounce, the company will have to recalculate its reserves using a lower price assumption. The writedown in value will manifest itself as a non-cash impairment charge on the income statement for the fourth quarter and impact the net profit figure. We will have to wait for the company to report this figure in the earnings results. [4]

What We Will Be Watching

We would be keen to hear the management’s view of gold prices in 2014 and beyond. There are a lot of unknowns in the global macroeconomic scenario right now. Following two continuous rounds of tapering by the Federal Reserve, emerging markets are facing headwinds. The state of the Chinese shadow banking system is not very clear. If a banking crisis occurs in China at some point in 2014, there will likely be global panic and gold may again become an instrument of refuge, thus driving up prices.

We are also keen to know the current status of Newmont’s discussions with the Indonesian government on the export tax issue. This tax will start at 25% in 2014 and increase to 60% in 2016. Newmont has indicated that this seems to be a duty on revenues rather than profits so the cost of production cannot be deducted before the duty payable is calculated. This will play havoc with the economic viability of its exports. You can read about this in a previous article we wrote on the issue. [5]

See More at TrefisView Interactive S&P Capital IQ Analyses (Powered by Trefis)

Notes:
  1. Newmont 2012 10-K, SEC []
  2. Falling Gold Prices Take Shine Off Mining Majors, Trefis []
  3. Weak Gold Prices And Impairment Will Dull Barrick Gold’s Results, Trefis []
  4. Gold miners braced for cuts in reserves after plunge in prices, Financial Times []
  5. Newmont May Consider Legal Action Against New Indonesian Export Duty, Trefis []